For many people looking to get out of debt, the biggest challenge they face is paying off their mortgage. If you’re facing this challenge, remember, you’re not alone! Below are 10 ways to help you pay off your mortgage earlier. You can also compare these methods using our free Home Mortgage Calculator spreadsheet. It will help you to get an idea of how much interest you can save, and see how many years you can subtract from your mortgage.
Extra Payments are Key
To pay off your loan early, you have to make extra payments on the principal, no way around it. You have to pay back what you borrowed someday, plus some interest. The majority of accelerated mortgage strategies require a plan for making additional principal payments, or reducing the interest on the payment , that way more can be paid to the principal. Sometimes borrowers use a combination of both of the two strategies.
Keep In Mind:
First find out if the lender needs you to state that the payment is principal only, before making any extra payments. This may mean simply clicking a “principal-only” button when making payments online, or writing “principal-only” on the back of your payment check. Doing so will ensure that your extra payment isn’t processed as just an early payment for the next bill.
Some of the following strategies can be combined in a kind of mix and match method:
1. Take Advantage of Your Tax Deduction
Qualifying for the home mortgage interest tax deduction, doesn’t mean the tax deduction is just extra money in your pocket. Don’t be fooled: you may get the money back in the form of a tax refund, but it is NOT a tax CREDIT. Think of it like a “discount” on what you have to pay to the government.
Here’s our suggestion: learn how much of your tax return is due to your mortgage interest deduction, then make an extra yearly payment on your mortgage of the same amount. The amount will decrease as you pay off your mortgage, your tax deduction will also decrease since you’ll be paying less interest.
How to estimate the tax return due to a mortgage interest deduction:
- Calculate the total interest you will have paid for the year (for example: $11,000)
- Multiply that total by your marginal tax rate (example: for the 25% bracket, 0.25 multiplied by $11,000=$2750)
- The answer, $2750, is approximately the tax returned for that year.
Try running a simulation using the Home Mortgage Calculator, you’ll be suprised how many years you can shave off your motgage!
2. Get Ready to Tighten Your Belt
You’ve probably already thought of this, but you might have to start cutting back and economizing if you want to make larger extra payments. Make a list of things you can do without for a little while.
3. Pay As Much as You Can Whenever You Can
Debt snowflaking is another name for making unscheduled extra principal payments. Lots of folks are changing their perspective and viewing these extra mortgage payments as an alternative to investing. If you have a 7% mortgage, and the alternative is to put the money into a 3% CD, the logical choice is to focus on paying of your motgage.
Of course, how much time you shave off your mortgage is determined by two factors: how much and how frequently you make extra payments.
4. Consider Downsizing
The quickest way to get out from under an overwhelming mortgage is to sell your home or rent or buy a smaller home with the equity you’ve accumlated. This isn’t a great option if you owe more than your home is worth.
5. Set more Small Goals
Try setting more smaller goals, not just one big long-term goal. You need to have willpower and self-control. With each small accomplishment you achieve, you’ll be more motivated to keep reaching out towards your final goal.
6. Imagine a 30 is a 15
The best choice for a home buyer is to only buy a house if they can afford the 15-year mortgage payment. Getting a 30-year mortgage and paying like it’s a 15-year mortgage is not the same as getting a 15-year mortgage from the start. This is because a 15-year mortgage will pretty much always have a lower interest rate- that’s important!
But of course you can’t go back in time and get the 15- year motgage, so what can you do?
Despite the challenge, you can try to make your extra payments based on the goal you aim to attain. For example, maybe you can’t pay off your mortgage in 15 years, but you could aim to do it in 20 years. Don’t give up!
The Home Mortgage Calculator lets you enter the extra payment amount, not how many years you want to shave off. Because it all depends on how much you can afford to put towards making extra payments, and that may change depending on your circumstances. But you can play with the numbers a bit to see how you can reach your 15-year or 20-year payoff goal. Excel has a handy built-in Goal Seek tool.
7. Keep the Momentum in Your Debt Snowball
Don’t lose steam now! Use your saving momentum and motivation and focus your entire snowball towards your mortgage.
In case you have multiple mortgages on your home, focus on paying off the one with the lower balance first, this will motivate you to keep going.
Refinancing definitley a viable option, as it can help you reduce your interest rate. One factor though, is if you will be staying in the home for enough time to see the benefits. Closing costs on a refinance should be considered.
Your required total monthly payment will be less with a lower interest, that is if you don’t change the term of the loan. If your goal is to shave a few years off your mortgage, try to increase your extra principal payments, then you’ll be paying the same amout as beofre.
Run lots of simulations, and remember to factor in the time-value of the closing costs. Try increasing the loan amount by the amount of the closing costs, to give you a more accurate idea.
9. Experiment with an Offset Mortgage Account
What is an Offset Mortgage? It’s a type of mortgage only offered by some banks, in which a non-interest bearing savings account (the “offset account”) is connected to a mortgage account. When the interest is calculated on the mortgage, the principal on the mortgage is offset by the balance of the savings account. For example, if you owe 200,000 on your mortgage and your offset account has a balance of 50,000, then the interest is calculated based on 200,000-50,000=150,000.
Adding money to the offset account is almost exactly the same (mathematically) as making regular extra principal payments. But, instead of paying down the mortgage directly, you deposit your extra payments into the offset account.
The primary benefit is that you maintain liquidity, meaning that you can withdraw the money from your savings account if you need to.
This method is good for someone who has a lot of savings and want to put their savings to work, instead of only earning 1% , what most savings accounts earn.
But an offset mortgage has some negatives as well. For example, the interest rate is usually higher than the normal mortgage, and that may include an annual fee. You can still experiment with this method by making extra payments with the Home Mortgage Calculator.
10. Try a Line of Credit as an Offset Account
When an offset savings account isn’t possible, and you want to maintain some liquidity, try this strategy. You’ll need to use a line of credit, like a HELOC (Home Equity Line of Credit) or PLOC (Personal Line of Credit). Not having enought home equity, means you probably won’t qualify for a HELOC, but a PLOC might be an option.
In this simulation, you would be using a separate line of credit like a second mortgage. Unlike an Offset Savings Account, a line of credit charges interest. A HELOC is also variable rate, it’s wise not to leave your entire mortgage to the uncertainty of a variable rate. Which is why you use a separate HELOC instead of refinancing the primary mortgage.
Don’t forget! The key to mortgage acceleration is paying down the principal. If you can find a way to lower the interest rate or the basis for calculating interest, it’s helpful, but you must combine it with bigger payments on the principal.